Professional Documents
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Manufacturing in India
Transformation in sight
January 19, 2011
4th ASSOCHAM International Conference on Indian Defence
2
About Aviotech
Attractiveness of India as a
cost efficient, high quality Work coming to India
manufacturing and service due to regulatory
delivery destination constraints in other parts
of the world.
Example : Engineering
Design, Sheet metal work, Example : Some types of
Specialised forgings surface treatment
Pull Factors
Increasing interest in Indigenous defence and
aerospace manufacturing and service delivery
Push Factors
Strong government policy impetus through
Focussed offset policy Buy and Make-Indian’ and A large homeland security
initiative requiring the global ‘Make’ Projects which opportunity being driven
defence contractor to invest have a minimum by significant government
in the development of stipulation of indigenous initiatives
indigenous defence and content / value add.
aerospace manufacturing
capability
At the same time, it must also be mentioned that the Medium and
Small Scale Segment of suppliers also includes suppliers who
operate niche technologies and processes, thereby making them
valuable.
With limited existing capacities and few suppliers for each specific
product/component – the total available Industrial base is rather
limited in depth. This creates issues vis-à-vis the ability to absorb
relevant work-share either from the Offsets or from large
indigenous projects.
The above chart collates from the responses of various OEMs and
Indian companies, their impressions on the broad spread of
industrial capability in India. The depth of each sub-category may
vary significantly and hence the above map provides a rough
assessment of the market capability set.
India also enjoys a very robust legal regime and this when coupled
with India’s strong insistence on protection of intellectual property
provide comfort to OEMs transferring sensitive know-how and
know-why.
The policy has extremely forcefully put forth the strong impetus on
developing manufacturing sources in India through a combination
of targeted procurement from Indian companies, allowing Indian
companies preference in the upgrades, Assessing capabilities of
Indian companies while drafting SQRs and trying as far as
possible, to undertake design and integration of platforms within
the country.
The human capital base for this industrial segment to expand in the
proportion desired and anticipated, requires severe augmentation.
Traditionally the sources of engineering talent for Defense and
Aerospace in India were few and the skills imparted to students
were far from current. Over the past few years, there has been a
sudden increase in the number of institutions offering specialised
engineering degree programmes in this segment however the
demand continues to far outstrip the supply. Aside from
volume, the quality of Defense and Aerospace engineering talent
from institutions has to be upgraded significantly. A sustained
shortfall in quality entry-level engineering talent has the potential
to derail the growth of this segment. To overcome this possible
scenario, some OEMs have established linkages with Institutions
and are actively contributing in making their curriculum relevant as
also assuring themselves of a steady supply of human capital.
Mid -level
Entry level talent Top executives
executives
The OEM stands behind the design and quality of its products and
services by the express warranty provisions of the contract.
However, the current Defence Procurement Procedures are silent
regarding the allocation of risk between the buyer and the seller in
the area of 1) Post-delivery product loss and 2) special damages
(also referred to as consequential and incidental damages).
Limitation of liability for post-delivery product loss and special
damages is a common feature in commercial and military contracts
in most nations across the world.
As the OEM does not hold title to the platform or manage the use
of the platform after delivery to the Government of India or the
Armed forces, the current policy forces the OEM to obtain
prohibitive insurance to cover the risk of post delivery loss which is
passed back to the government as a component of the price bid.
Special damages also referred to as consequential and incidental
damages, are liabilities typically not borne by the OEM. It is
impossible to assess exposure to such loss and damage as special
damages by their nature are remote, unquantifiable and
uninsurable. The potential liability for special damages can be
astronomical and grossly disproportionate to the economic benefit
received by the OEM from the sale. Without the appropriate
allocation of risk in a contract, the OEM could be entering into a
contract, which threatens the financial health of its OEM far beyond
the benefit obtained in a single contract action. In short, when the
OEM offers goods and services to a Customer on a “best value for
money basis” its offer is calculated on the basis that it will not be
exposed to loss of use, loss of profit or other special damages.
FDI
Indian industry over the past few years has shown the ability to
respond effectively to the market opportunity, especially in the
global market. There can be no better indicator of this than an
assessment of Aerospace exports as a testimony to this fact.
Indian Aerospace Exports over the last ten years can be very neatly
summarised into two phases – A first phase until 2006-07 and a
second phase of the subsequent period. The first phase of 2001
until 2006 which saw stagnant, lacklustre performance with exports
virtually stagnant and ranging between INR 223.57 Cr. (Crore) in FY
2004-05 and INR 407.73 Cr. in FY 2001-02. The Aerospace Exports
were also not displaying any significant growth indicating a less than
healthy state of the industry. The export performance witnessed in
this period was largely driven by export actions of DPSUs like HAL
and BEL. The period from 2006-07 onwards sees a rapid expansion
in this activity indicating a strong focused industrial expansion of
the sector. The levels of exports rose significantly from INR 350.02
Cr. in FY2006-07 to INR 2775.01 Cr. in FY 2007-08 indicating a jump
of 692% on a YoY basis further to INR 6697.32 Cr. in FY 2008-09
indicating a jump of 141% on a YoY basis
For the Indian industry, its journey towards being an integral part of
the global supply chain has only commenced. The path ahead is
tough, however the intent appears well-set.
Key Metrics
Rahul Gangal
Director - Defence Advisory & Investments
Rahul@Aviotech.com
www.aviotech.com